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With April 15 around the corner, most of us have taxes on the brain. Below, TPG Senior Points & Miles Contributor Jason Steele shows you how to get the most out of these inevitable payments by choosing the right travel rewards card and paying online.
They say that there are no sure things in life but death and taxes. And as many Americans face the inevitable tax payment on April 15, now’s a good time as any to take another look at how you can use your tax payments to increase your rewards balances.
The Basics of Paying Taxes with Your Credit Card
You cannot pay the IRS directly with your credit card. Instead, the IRS authorizes third-party providers to collect tax payments. And while many states forbid merchants from adding surcharges to credit card payments, they make a convenient exception for payments to the government (and some government-regulated utilities). You can see a list of these authorized payment processors at the IRS website.
To be clear, it’s usually a terrible idea to finance your tax liability by using a credit card, even if you are earning rewards in the form of points, miles or cash back. Just as I would tell any rewards credit card user, it’s best to use another form of payment unless you avoid interest charges by always paying your statement balance in full and on time. If you expect to incur interest charges, then you should be using a card with the lowest possible interest rate and/or a promotional financing offer. Furthermore, the IRS itself offers financing options that are likely to be more attractive than the standard interest rates of most credit cards. To learn more about these options, contact your tax preparer.
What’s New for This Year
Since I looked at paying taxes with your credit card to earn rewards last year, there have been a few significant changes. Previously, authorized payment processors would charge different rates for credit cards belonging to different payment networks. Visa, MasterCard and Discover card users enjoyed the lowest rates, while American Express users were being charged the highest.
It now appears that the authorized payment processors are charging the same percentage for cards from all four major payment networks. As of this writing, the current fees for IRS payments are:
- 1.87% for Pay1040.com
- 1.99% for PayUSAtax.com
- 2.25% for OfficialPayments.com/fed
The major benefit of this change is for those using an American Express card. Previously, the best rate for these payments was 2.35%, while the lowest rate for Visa, MasterCard and Discover was 1.87%. Now, you can use Pay1040.com to enjoy the 1.87% rate regardless of which kind of card you use. In addition, Plastiq is now offering a 1.75% rate on tax payments made with a MasterCard through April 18. Interestingly, Plastiq is not currently listed by the IRS’ page for authorized payment processors, but I have no reason to doubt its legitimacy.
Also, note that these rates are for IRS payments. Some of these payment processors will accept payments for some state taxes, but other states have their own payment processors that can charge different rates.
Choosing the Best Card to Earn Travel Rewards
So long as you’re avoiding interest charges by paying your balance in full, the name of the game with tax payments is earning rewards that are worth more than the fee. In the case of Visa, American Express and Discover cards, the lowest fee available is 1.87%, and for MasterCards, your target number is 1.75% if you choose to use Plastiq.
Here are some cards that offer the best net returns for tax payments, based on TPG’s latest monthly valuations and a $5,000 IRS tax bill:
- Chase Freedom Unlimited — This new card offers 1.5 cents per dollar, ostensibly as cash-back rewards. But, as fans of Chase’s Ultimate Rewards program and the Chase Freedom card know, 1.5% cash back earned from this new product can essentially earn you 1.5 points per dollar spent if you have the Chase Sapphire Preferred Card, Chase Ink Plus Business Card and other credit cards that earn Ultimate Rewards points, and those points can then be transferred to airline and hotel programs. Since Ultimate Rewards points are worth 2.1 cents apiece, this option offers a gross value of 3.15 cents per dollar, and when paying a 1.87% fee (as with a Visa), you enjoy a net gain of 1.28% on your tax payments, or $64 in value on a tax payment of $5,000.
- Amex EveryDay Preferred — This card offers one Membership Rewards point per dollar spent, but it also offers a 50% points bonus when you use it more than 30 times during a statement cycle. Since TPG currently values these points at 1.9 cents each, you can earn rewards worth 2.85 cents per dollar when you earn the 50% bonus, which offers a net return of 0.98 cents per dollar after the 1.87% fee. This equates to $49 worth of rewards on a $5,000 tax payment.
- Discover it Miles — This card offers 1.5 miles per dollar spent, and miles are worth one cent each toward travel statement credits or simply as cash back. In addition, cardholders receive double miles during their first year, offering a total of 3% in value. Therefore, you can receive $56.50 worth of rewards (so long as you’re eligible for the double miles offer) on a $5,000 tax payment. For more about this offer, read my post, Discover it Miles Offers 3x Rewards for First Year.
- Starwood Preferred Guest Credit Card from American Express — At 2.5 cents each, these points are more valuable than any other currency included in TPG’s valuations. And with the new 1.87% rate for Amex payments, you can use this card to see a net gain of 0.63% on your tax payments, or $31.50 in value on a $5,000 payment.
- Barclaycard Arrival Plus World Elite MasterCard — This card offers double miles on all purchases, and each mile is worth one cent each as statement credits toward travel purchases. In addition, the card offers 5% of your redeemed miles back, for a gross return of 2.1%. Since it’s a MasterCard, you can use it to pay the 1.75% fee with Plastiq and realize a net return of 0.35% or $17.50 on a $5,000 tax payment.
- Alaska Airlines Visa Signature Card — As TPG values these miles at 2 cents each, and this card offers one mile per dollar spent, you receive 0.13% in net value after the 1.87% fee, or a mere $6.50 on a $5,000 tax payment.
Other Tips and Tricks
1. Leverage the convenience — While you earn plenty of points and miles from making tax payments on your credit cards, the net gains after the fee you pay are much more modest. Nevertheless, consider some of the additional benefits. By making payments online, you save the time and cost of mailing a payment, not to mention avoiding the possibility of it getting lost in the mail. Note that you should also be able to set up electronic withdrawals from a bank account if you want to avoid using credit cards altogether.
2. Meet minimum spending requirements with minimum effort — Many credit cards require a minimum spend of $3,000 to receive the sign-up bonus. For some cardholders, it can be worth paying extra in fees to meet this requirement while simultaneously paying off their taxes.
3. Reach spending thresholds — Similarly, there are several cards that require spending a certain amount in order to receive a bonus, such as the new JetBlue Plus Card that offers Mosaic elite status after cardholders spend $50,000 in a calendar year. Reaching this or other threshold bonuses can be well worth paying a 1.87% fee.
4. Consider a card with 0% APR promotional financing — You can get the best of both worlds when you earn travel rewards and receive some interest-free float, perhaps making the processing fees worth paying. For example, the Amex EveryDay Preferred Card offers 15 months of 0% APR financing on new purchases, (after that a variable APR rate of 13.49%-23.49% applies) and it also happens to offer some of the most valuable rewards per dollar spent. Nevertheless, I would try to pay off the balance as soon as possible to minimize your outstanding debt, which can lower your credit score even if you aren’t incurring interest charges.
What are your favorite travel rewards cards for paying taxes?
- Earn 15,000 Membership Rewards® points after you use your new Card to make $1,000 in purchases in your first 3 months.
- Use your Card 30 or more times on purchases in a billing period and earn 50% more points on those purchases less returns and credits. Terms and limitations apply.
- 3x points at US supermarkets on up to $6,000 per year in purchases (then 1x); 2x points at US gas stations; 1x points on other purchases. Terms and limitations apply.
- You can use Membership Rewards® Pay with Points to pay for all or part of your flight, hotel booked and paid in advance, vacation or cruise booking through amextravel.com.
- 0% intro APR on purchases and balance transfers for 12 months, then a variable rate, currently 13.49% to 23.49%, based on your creditworthiness and other factors.
- Terms and Conditions apply.
- See Rates & Fees